18.06.2022

Strategic planning tool - BCG matrix

Key information:

  • The BCG Matrix is a strategic planning tool that helps companies evaluate their products and decide which to focus their attention on.
  • It consists of two dimensions - market share and market growth rate.
  • Based on these dimensions, the company's products are placed in one of four areas: stars, question marks, milking cows and dogs.
  • Star products are products that have a large market share and are growing rapidly. They require a lot of money, but can bring big profits in the future.
  • Question marks are products, having a low market share but growing rapidly. They require a large investment, but their future profits are uncertain.
  • Milking cows are products that have a large market share, but grow slowly. They are stable products that generate a steady income, but do not require a large investment.
  • Dogs have a low market share and grow slowly. They are low profitability and the value of their future profits is low.

Details below!

BCG matrix (also known as BCG portfolio analysis) is a useful tool when making a analysis of the company's products and services. It is one of the oldest and best-known methods of portfolio analysis. It is named after the consulting firm Boston Consulting Group, which was the first to use this tool in 1969.

Purpose of portfolio analysis

Portfolio analysis is a process that allows you to take decisions regarding the organization's offered product range. Conducted in an effective manner, it allows for the evaluation of various areas of a company's operations, which in turn allows for the identification of those that can bring competitive advantages and those that do not meet expectations. Portfolio methods allow strategic formulation of variables in a coordinate system. They are used to determine the state outside and inside the company.

BCG matrix - what is it used for?

The BCG matrix allows not only to assess the attractiveness and competitiveness of a company's products and services, but also to opportunities to grow their sales and their ability to generate profits. It thus facilitates strategic consulting in the planning and investment decision-making process. It helps answer such questions as which products should stay in the company's product mix and which products have the potential for profit in the future.

Main product evaluation criteria:

- the financial turnover the product creates

- the relative market share of a given product to that of the largest competitor, shown on the horizontal axis

- the life cycle of a company's product

Knowing these three estimated values, you can assign products to the right categories in the BCG matrix, and thus build the right market strategy.

How to do it? What categories are involved?

Strategic areas in the BCG matrix

Stars

These are market leaders with high growth rate. They usually do not generate large profits, as they require a lot of money to keep up with high growth rates and fend off competitive attacks. However, investing in them is profitable due to favorable market trends and high competitiveness and product potential. When the growth rate starts to decline, the stars become milking cows. The marketing strategy can be aggressive and rely on increasing their market share or defensive, whose main goal is to maintain its current market position.

Milking cows

In the BCG matrix, objects with a large relative share of a slow-growing market. These are established and successful products that provide the company with a sizable portion of profits. Unlike the stars, do not require as much investment to maintain market share. In fact, it could be argued that it is the milking cows that provide cash that the company can use to pay fees or to support other units that need to be reinvested. Only if the milking cow begins to lose its relative market share will the company be forced to increase investment to maintain its leadership position. Maintaining market share should be a producer's primary goal. It is defensive strategy.

Question marks

They have relatively Low market share with high growth rates. They require large expenditures if a company wants to put itself forward as a leader in terms of production. The costs often incurred include, for example, the costs of expanding production facilities, or investments made in new technologies.

The company's management certainly has an important question to decide: which of the question marks to turn into stars by increasing their market share (aggressive strategy), and which are better to give up (uses the harvest strategy, which involves leaving the market, previously intensively exploited).

Dogs

There is a reason why the parallel name used is "crutches." This is because they operate in very unfavorable market conditions. They have a large number of competitors and poor growth prospects. There are times when products generate enough funds to sustain themselves. However, they are not expected to be serious sources of cash.

The recommended strategies are thus: harvest strategy or escape strategy, involving the abandonment of a particular market.

Construction of the BCG matrix

In order to construct the BCG matrix, there is a horizontal axis, which indicates the product's market share, and a vertical axis, which reflects the industry's growth dynamics. The process results in a matrix that needs to be supplemented with detailed information on the organization's offer. Carefully analyze each element of the offering in terms of market share, compared to the largest competitor, and the growth rate of the sector in which the company operates. This will assign each element to one of the four areas of the BCG matrix.

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    What does the BCG matrix give us?

    The BCG matrix is characterized by many advantages. First of all, suggestiveness, readability and simplicity. In addition, it provides a clear indication of the competitive position and identification of the company's market situation, opportunities, as well as strategic threats.

    However, it is not without defects. It certainly requires fairly accurate estimates of the position of the company's products, the pace of market development and an analysis of the degree of connection between the sales volume of individual products and their markets. In addition, the BCG matrix is mainly applicable in traditional markets with the classic product life cycle model. Thus, it may be an inadequate method in some cases, such as new technology markets.

    Application of the BCG matrix

    A systematic BCG analysis provides the opportunity to Assessing product development over time. The pattern of this development involves the transformation of products from question marks into stars and then into milking cows.

    In order to improve the results of portfolio analysis, you can:

    • Use surplus cash generated by milking cows to subsidize stars and develop question marks,
    • eliminate dogs from the market,
    • take care of the milking cows and make them profitable for as long as possible.

    BCG matrix template

    Use our BCG matrix template when creating your own portfolio analysis!

    Summary

    The BCG matrix is a useful tool for companies that want to understand the position of their products or services in the market. By classifying products into four categories, which are stars, question marks, milking cows and dogs, the BCG matrix allows companies to determine which products need further investment and which should be phased out or kept at current levels.

    It is worth remembering that the BCG matrix is not the only strategic analysis tool and may not always be appropriate for every business situation. However, under the right circumstances, such as when restructuring a product portfolio or planning a long-term business strategy, the BCG matrix can provide valuable information and aid in decision-making.

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